Strange But Untrue and Other Facts That Don't Matter

Like good sports commentators with slow runs of play to fill, finance turns to statistics to fill the time. To many of us, data is data and the more reliable data you have the more chance you have of being able to to sift the odd gram of gold out of the muck. But there comes a point where the noise exceeds the signal and, as Theodore Roszak said, there is "Data data everywhere and not a thought to think"

But slow days and newsless days (today being a pretty good example) has everyone turning to lower grade soothsayer techniques in the absence of others. Was there a power failure at the Financial Meteorological station supercomputers leading the weather forecasters to turn to slicing up small animals and spreading out their entrails instead? For TMM's inboxes are filling up with statistics which instead of being valued for their ability to forecast are being offered just for for their bizarre interestingness. That Met Man would say "Oh I don't even care if it will rain, just look at that squishy red bit, I didn't know it would be connected to that moving wormy thing". The financial equivalent of which is -

"Of the four negative weeks just two of them included losses over 1%". "Tuesdays have been up days for the last x weeks""The S&P 500 trades at 12.8% or higher from its 200 DMA just 8.3% of the time".

How riveting yet absolutely devoid of predictive powers. This is the financial equivalent of the football commentator explaining how many times the letter "e" appears in the away team captains' grandmother's names over the past 40 seasons. Markets have to say something. There can be no silence. Audiences don't expect silences and the suppliers of information abhor a silence, be they media or sell side information providers. We are pattern recognising beings but there is a point where data mining crosses over into the astrological. Finance's version of "Thats Amazing"

However we are reminded of a very apt interview question for would be traders that does rely on Bayesian probability - "If I was to flip a coin 99 times and it was to come up heads each time, what would you call for the next flip and why?" Of course the 50/50 rule is the one that "Jim Smug" fresh out of Uni would answer, but we are looking for the cynical old salt who announces. "Heads because the coin is obviously bent". But in the cases above, the twist of fit and assumption to derive the next move is just far too far away to be useful.

TMM have long been wanting to write a book to counter the books you find in your friends' lavatories entitled "Strange but True", the ones to be found next to the 1986 Guinness Book of Records and the odd "White Company" catalogue that proves that men aren't the only ones to dawdle on the pan. But TMM's book would be called "Strange but Untrue" - A compendium of strange facts and figures all of which are amazingly untrue.

Originally it was to contain Strange but Untruths such as "Most shark attacks occur in less that 1/2 an inch of water" "17% of the air you breathe on the subway is human skin""If you spread the surface area of your lungs over the area of a tennis court you will die" Actually that one is true.

But we have realised today that the world of finance is so full of data from which absurd sound bites can be fashioned we thought we would add our own, so if you are in the business of peddling information to clients or just bored and want to confuse a 12yr old quant analyst please feel free to pick one of the following and present it with a serious face and "knowing" eyebrows .

"The 4th friday sees a reversal of a percentage equal to all the rises on the Wednesdays divided by those of the Tuesdays""The PE ratio of the leading 20 Estoxx is equal to the fibonacci retracement of their Market caps"."Just 26.78% of the best performing days are in the week before Lent (conditional upon Easter being in April)""If you read the first initial of the DOW components in reverse market cap order they spell CRASH COMING""19.87% is the average PE of firms with PEs between 19.75% and 20% and is also the year of the great crash.""The last time the SPX went up a bit, up a bit more, down a bit, left a bit .. FIRE. .. They missed earnings by 12%". "Currency codes have only 3 letters against most nasdaq stocks having 4 because spot dealers attention span isn't as long.""The introduction of the Euro was a really good idea".

All of which may be completely untrue. But the market loves a statistic or a truism and TMM often spend their day wincing at some of the old catch phrases that are wheeled out as simple justification for not knowing. We aren't just talking the nonsense that comes out in annual reports, analyst or Investment Manager reports such as -

"Your board continues to implement the new multi-polar strategy, though current headwinds offer significant challenges""The current unfolding barbell perfectly describes the arc of investor indecision as the underlying market shifts to the paradigm we descibed in last months bulletin""The Investment managers after careful consideration have adjusted the benchmark – investors will be pleased to see that the latest quarter has substantially out performed this new threshold"

We mean the ones that are considered gospel and if muttered knowingly are meant to end debate, such as -

"More people have bought than sold". - Or "Everybody's buying". - For a trade to be complete every sell has to match a buy. "Whatever goes up will come back down" - Voyager 1 is a good case "not" in point. As are UK rail fares. "You can’t go broke taking a profit" - Unless you spend more on your vices than the amount you take as profit."Prices always move for a reason" - Rarely for the reason most people believe."New new things always make money" - Unless they involve trains ( railroad stock dumps / Eurotunnel) or Vanadium Redox Batteries as TMM found out to their cost. . "Charts tell the future" - Do they? Can you tell us the future from this one please?

Have you got it? Many things are not as clear as they would seem yet somethings are clearer than you think.

I rotated out of equities once. It was just after i tried to catch the falling knife, having mistaken it for a dead cat. The guy chucking stuff out of this window is pretty demented, i'm waiting for a fridge freezer.

We piled into some shorts at IWM 1000 this morning for absolutely no good reason at all other than "'ere, John, this old market is a bit thin, innit?The f*cking f*cker's acting like it's f*cking silly season."

As of this moment we imagine that recent longs of the leveraged variety might be feeling distinctly QEasy about future Fed policy. A certain hedge fund manager has changed his name to David Taper.

on EM: all we need is a bit of leverage on top. EM CDO ("for the pick up in yield, you know"), please?

on $: C/A better, deficit better, and the first CB to have been all-in has now demonstrable evidence that it outperformed the more restrained ones (so that those will now have to follow). If you believe QE (among other things) stopped the unwind of the ginormous 2002-2007 short dollar accumulation, there is lot of pent-up demand for Uncle Bucky.

PMs (again, we dont play but find them interesting) are a good example, as they are owned by a shit ton of people who have no business having such large proportions in inert money. For those with the guts to navigate this, we have no problem believing these can go much, much lower.

EM bonds and US HY are a great place to look for signs of impending doom but we're not seeing all that much fear at the moment in credit spreads. Despite a 7% drop in the equity index of a major G7 economy overnight, risk taking seems still to be in vogue today. Perhaps this is the Exit Rally, here the smart money takes advantage of any bounce to sell, before the days of illiquidity to come.

US equity market enthusiasts, who are now largely of the simian persuasion, also seem blithely unconcerned regarding the recent comments about the rug on which they are currently standing and the prospect of it perhaps being pulled away.

But really it is completely understandable, why should Mr M.M. Monkey have to worry about such "macro" issues as the FED "tapering"? After all, he has made a pile of money these past few months, not because of QE, but because he (like his hero David Tepper) is a "bottoms up" stock-picking genius! Not only that, but because he is a technical genius, who knows how to "buy the dip"!

Why should Mr M.M. Monkey worry about the volatility in JGBs? Or about something happening to the yen overnight? Or about whether China is contracting? An unwind of AUD carry trades? That stuff can't hurt him. FX is for Japanese housewives and bonds are for old men.

This market has made the Margin Monkey bullet-proof. He puffs out his chest and stands tall, surveying the knee-caps of other traders, like a 2 foot Colossus.....

SEC are hauling in the SAC compliance guy at last. He will probably be the most likely to squeal. You can always count on HR and compliance to look out for #1, which in this case isn't going to be Stevie.

Today we tagged SPX 1656, for an almost perfect 38.2% Fib retrace of the move down yesterday from 1687 to 1636 ... 50% retrace would be 1661-1662.

Tonight's big question is whether the BoJ can hope to weaken the yen in the face of increasing volatility in the JGB market that required intervention last night. We think they will now choose to allow the yen to rise a little this summer rather than risk a meltdown in the bond market that might throw the economy into recession and risk a currency crisis at the same time.

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As for the strong dollar/ short PM trade. I understand all the points, I just wonder, out loud, wheather this is the start of a mega year trend of strong Bucky or just a re-set to a new range bound. We like to think of trends but ranges are more common.

Interesting articles about Copper financing and China trade balance. GS thinks the govt will end this, and is therefore bearish on the green metal

Monkey's favourite small cap stocks look to be offered today, I wonder if he will press the lever, I mean, buy the dip?

Raining in New York and a lousy Memorial Day weekend ahead, and the mood of punters isn't going to be improved by today's morning trade. Fairly predictable rejection of the weak rally attempts from soft support levels so far, currently Mr Market is having a go at holding yesterday's lows at 1636-1637. Plenty of room below. It is comforting when the technical stuff works as it is supposed to.

Continued weakness in EM and HY credit, all drip drip dripping lower without any noticeable bounce. We ran out of serious buyers for that stuff a few weeks back, and it's been strictly Tool Time™ since the beginning of May to the delight of your average emerging and frontier credit sales shag:

("you'll never believe this - I just sold dollar-denominated debt in Burundi Metals, best known for the exploratory Kissoffurwonga uranium mine, at 300 bps to Treasuries. They bought it 'for the yield' ").

The EWA is following the "coastline" model today - and extremely well, TMM!

Looking at the auzzie banks, who took a drubbing this week, down 6-8% and about 15% from highs.

Interestingly, SUB/Senior CDS spread looks pretty muted. Guess the equity risk premium, which is supposedly going to 20 - Inflation, has a rather quick way of reverting and wiping out a years worth of dividends in a week.

Here's a great way to lose money that is obviously targeted at retail investors with no concept of how the credit markets work. Ere, shag, look, Johnny Retail wants yield, right? We have a product ere that is called High Yield, right? Nice. But it's bonds, and Johnny hates bonds. Hmm.. but most of all he hates one type of bond. Treasuries. Because he's been told to by so many Smart Investors on TV. So, voila!

So.... if credit spreads fail to remain at their current all-time tight levels, HY will fall but the price of Treasuries might well stay the same or even rise, so then you're going to be well and truly f***ed... now let's build in 3 x leverage, for fun....

ok are any of you guys in these anonymous bloomberg group chats that have been setup by bloomberg (anyone can join, are given a member number, still visible to compliance, etc) -- there is one for econ/macro ...

The original and interesting interview question was not what a Bayesian might think about the frequency of a heads appearence following a a run of 99 Heads... but rather.. and as it was essentially posed by J Keynes himself in his Treastie on Probability..

What would you suspect that the "herd" would think if they saw such a run... The outcome of the coin toss is often so far in the future as to be irrelevant... "Will the FED eventually tighten"... etc. The correct interview response.. and one that has been replicated perhaps more than any behaviorial economic fact in existence.. via what is called the Keynesian Beauty contest literate.. Is to respond that the first question I have to ask is not about the coin but.. how smart are the people whose estimate I am concerning with... Its their "average" estimate that I am concerned with...not the trivially correct spreadsheet solution..

(Of course, readers who know their history know that was a summer of unrest in the UK during a period of high unemployment. But who cares about jobs when the rich get richer and the market makes new highs every day?)

Meanwhile the holdings of the world's largest hedge fund (FRBNY Inc) have been taking a pasting of late. Mortgage-backeds and Treasuries have both been taking a bit of a hammering over the last month or so. The recent trend of 10 bp jumps in 10s seems unlikely to continue.

Higher US mortgage rates are already leading to a drop in new purchase and refi applications, which would stop the alleged "housing recovery" dead in its tracks - if it wasn't for the fact that so much of the activity is cash-only buying by HFs and other intrepid speculators. This will end badly. Again.

Looking at the overall landscape of the credit markets, I would say that there is a very significant chance we will see increased FED chatter about tapering of QE in order to reduce the volatility in USTs and MBS, and that a serious jawboning campaign is now imminent. The equity market, as ever, is of only incidental concern to the FED, and the implications of tapering for margin monkeys are simply a case of "collateral damage".

The BoJ faces similar problems but the stakes are much higher. Having succeeded in depreciating their currencies, it is increasingly likely that both central banks will decide that the job is done for now, and will fold their tent and pack up for the summer. This will be very helpful to the ECB, who are unable to follow the QE playbook, but desperately need a lower € to help stabilize the flagging Southern European economies.

Of course, the financial media are smarter than we are, and have told us all that the recent movements in US 10y Treasuries are due to the "great rotation" as retail investors "move off the sidelines", and "sell bonds" in response to the "better economy", and in order to buy "cheap stocks" (cue another appearance by Jeremy Siegel).

Amazing how those minuscule holdings of USTs by retail investors can make the market move.....

Bonds and stocks go down TOGETHER! Remember chaps, yield has been "risked up". I am not sure what kind of models you are running, but we employ a fairly standard fair value model of the US 10y yield and it is currently reading 3.5%ish. Even if this would still be pretty low by historical standards, I am sure it would cause all kinds of problems all over the place.

The market cannot live with "fair value" yield here ... this is one of the unfortunate side effects of QEinfinity and investors buying Indonesian USD loan books at 2.65% nominal(!) yield (just look at the latest G&F, last page).

LB's boots are already full of fixed income. In fact we think it's time for some TLT calls, to add a bit of leverage.

Major misunderstandings out there about Treasuries and QE. Ending or tapering QE doesn't mean that Treasuries will be offered, more likely the reverse. The flow of funds during recent tightening cycles (end of QE1 and QE2) was simply to reverse the QE-driven movement out along the risk curve. So HY and EM bonds will be sold and Treasuries bought.

As for equities, the critical feature will be the fate of the Yen Carry Trade, which appears to be have been causing some market indigestion of late. We have some yen longs and Euro shorts on here, too. Sharp reversals in the yen could get very messy indeed.

We are shorting JNK, IWM, XHB, etc.., in fact if it's gone parabolic in May (looking at you Mr Musk), then we are short it today.

Core PCE is running at the lowest level in history, and the Fed has missed on the employment side of the dual-mandate for five years running (declining participation rate and rising youth unemployment on top of other structural issues mean 150k NFP monthly not going to fix it either).

The housing market is improving off a very low base, but without HARP and other "helping hand" programmes the market would still be on its knees. The Fed has succeeded in driving savings rates down post the Lehman surge, but unless there is a sharp uptick in economic activity it seems very unlikely that the overall household balance sheet in America will look very healthy any time soon.

The Fed will certainly be worried if there is a continued sell-off in MBS (remember, this is the first market on the "tapering" agenda) and will seek to contain volatility in fixed income. 1m5y swaption vol in the US recently reached some worrying levels, and if this trend continues my money says the Fed scrambles to contain it.

Actually, the above is wrong. UST are likely to be the first to feel the "taper", but MBS will certainly feel the most direct impact should the market sell-off become disorderly (already got a preview of that during this latest sell-off).

In an ideal and transparent world, Bernanke would come out and say the following:

"Stop buying silly season stocks with 1000x multiples right now, you complete tools, before you lose your shirt, pants and your 'lucky trading underwear'. Sell shares of Bobby the Builder, Lenny the Loan Shark, Mickey the Mortgage Broker and anything to do with Mr Musk's space ventures. We are not going through all that bubble crap again.

Or else you are going to be subjected to the most intense up-tapering of jawboning about tapering that anyone has ever endured.... also if the BoJ doesn't stop f***ing with our bond markets and buy some yen soon, we are going to do it for them."

But we can probably expect the communication to be a little less direct. The market took one look at the 3.81% mortgage rate and sent its own message by selling the XHB hard this morning.

Meanwhile the performance chasing continues as we approach month's end.... and thoughts turn to the early days of June.

It will be interesting to see the fund flows change as June begins. We can expect to see movement out of HY funds for sure, and look for that to accelerate over the summer. Looking across the ETF landscape, EMB, JNK and HYG have been weak all through May. The XHB, which has been leading the charge, is suddenly lagging. EWJ is going down in large chunks without any apparent panic so far. These all look like a good place to start looking for June's sacrifices.

Speaking of Strange But True, Lumber prices are an excellent leading indicator, much better than say, employment, which is a well-known laggard. The price of lumber rose until March, when it began to fall. More recently, lumber futures have been cliff diving, likely a reflection of (Duh!) falling demand from the supposedly effervescent construction industry.

REITs looking more attractive, for sure, but would rather wait for the inevitable washout of all equities before picking around in the wreckage. The price of the preferred shares is usually a good tell of when the bottom has been reached, as selling those is a clear sign of distressed investors.

Several commentators have alluded to the fact that Bernanke is QEasing like crazy and not producing any significant inflation, b/c the aggregate demand of a large group of lower wage earners is essentially fixed. There is a nice discussion here of how QE has actually produced rising real interest rates at the same time as disinflation takes hold. This is a mess for central bankers, as this is where things start breaking.

Mainstream economists of the disingenuous Wall Street ilk are banging the drum about interest rates rising sharply from here because of growth and reflation. This is all based on standard models that do not apply in ZIRP and QE regimes, and simply did not work at all during the Japanese attempts to use QE to reflate. JGB yields just sank lower and lower as the liquidity trap captured all monetary injections.

No reflation occurs in the real economy via QE although asset price distortions occur and can be persistent. What happens eventually is that one day yields rise a bit and investors look up and realize they make more money in safe old 10y govies (2.2%) than they do in dodgy US small caps (1.1%), commodities or Bitcoins, and then the asset price bubble deflates. Exhibit A: The Nikkei of the 90s - we might be about to watch another re-run of the same movie!

C SaysBig picture is still where it is at.Global rebalancing ongoing.Global oversupply of labour still rising.Global saving high ,but still not translating into current consumption demand as opposed to hoarding hence low transmission value for loose monetary policy.Taper ,or not, none of the above equates to rates spiking. I think the lows are already in ,but as it stands there's no fundamental growth case out there that suggests they should be higher right now than they already are. Low inflation ,ecxcess labour ,output gap,stagnant labour costs etc etc.great ierselec

Last day of May. We have had some almighty bad days to kick off June and July in recent years.

A few HFs will have taken a hell of a beating in Japan this week. RORO has been sleeping for a few months but I reckon we'll see some fireworks if USDJPY crosses 100, EURJPY crosses 130 again and heads lower. Carry unwind and liquidity shortage is always great fun.

We bought EWJ puts when it was up at 12.35 or so, since when we have caught most of the Cliff Dive. The 200 dma is down below at 10.... surely only a matter of time before other markets test the waters with a vertical plunge, Acapulco style?

Even the preferred shares of REITs are taking a real battering today, along with the common shares, as rates spike at the long end once again.

There is going to be some outstanding value out there soon, once the babies start being thrown out with the bath water. If there's one thing we really like doing it is buying up large amounts of cheap preferreds when people are having a good panic about higher rates.

VIX is looking ominous today. Normally in this market there has been vol selling down to oblivion early on Friday mornings and then everyone buggers off early - in the Tesla they leased with the profits from buying TSLA. Today is different.

Lots of charts have that "bubble about to pop" look. Or that ugly look where it popped already, but nobody noticed yet b/c they are too busy at the caviar and champagne.

TSLA, SCTY, Z, LL, LNKD, BMRN, TRLA*. All of these charts have the same look - there was a short squeeze, blow-off top, then they rolled over or are about to roll over. Some sleepy longs in these names are going to wake up one day and be massively pantsed by this market, and it is going to happen in the not-too-distant future.

From here, charts that have been going up vertically for months always seem to end up the same way. Mean reversion. Even a visit to the 200 dma is going to be absolute TOTAL CARNAGE.

Look at LL for example, P/E is 40, peaked at 90, trades at 82, but the 200 dma is down at 60. Everywhere you look in small caps you can find charts that look the same. When the music stops, you don't want to be the one holding this particular set of bags, trust me.

*Full disclosure. Falling Knife Capital may be short a number of these names.

VIX north of 15 on a Friday afternoon. Long only funds doing some serious rotating and hedging. Sell side starting to shut up shop for the summer. Dodgy small cap shares safely off-loaded to hapless small punters.

Put/call ratios fell to a very low level this week, close to TWICE as many calls as puts, clearly an expression of a very special kind of fear: "fear that the bloke at the next desk is going to eat my lunch and make twice my bonus".

C Says'At some point I imagine people will stop just looking at a US employment number revsision and start looking again at how difficult growth is to buy. They all need it,and their attempts to get it are proving to be quite zero sum at this point.Wake me up when real incomes start to rise.Until then risk taking is in milking mode.

Shocking PMI. Really shocking. This economy is really in the doldrums. I am surprised that 10y Treasuries didn’t move 20 bps on that, instead of just 10. But of course that data point calmed the Taper Talk, so...

This beast has one more rally/squeeze in it. Took profits this morning, one has to respect the possibility of a man standing behind you with a red hot poker.

Yes indeed - we were able to avoid the arrival of Cold Steel this afternoon, even as Mr Shorty's nether regions received an unwelcome intrusion. After all, the last 212 Tuesdays have seen the SPX rise at some time between 9.30 and 4.

A lot of the "Death of Treasuries" genre out there at the moment, Point of No Return, oo-er mrs kind of stuff.

Then again, given today's miserable PMI, it might equally well turn out to be Bonds at Point of Very Nice Return, Don't Mind If I Do, Squire, I'll Help Myself To A Nice Slice of Mean Reversion, Thank You, Mr Shorty.

please note -7% punch in Turkey yesterday (oh yeah the pussy riot excuse) and -10% flush in Philippine today the EM darlings are getting clubbed which strenghens my view that a major change in trend is in the cards

Any thoughts on mReits. Sell off looks to be justified by move in mbs rates but one can only guess at company book values. I am getting interested here. Cant see Bernake too pleased with 30yr above 3.5%.

My initial thoughts are that the em trade is just a carry unwinde and not a pre courser. Will wait to see 2nd leg. Most us dividend investors haven't a clue about intl capital flows. But yen much lower can certainly change my mind.

Generally agreed with the thoughts expressed here on rates and specifically about Bernanke not loving the performance of his portfolio in May. This doesn't go on too much longer. Taper talk is likely to continue until the market retreats.

Definitely watching the mREITs, my personal BUY indicator is when the preferreds sell off and start looking much better than high yield debt. At that point you can usually scoop up the common near the lows as well. We are getting there for sure.

Not diving in yet, you have to figure there is a big ugly down day out there for everything equities and that's when we plan to go shopping for yield. With REITs you do well if you buy twice a year at the fire sale, any other time you end up losing.

Things that bubbled a lot seem to be selling now. We can see a host of stocks that shot straight up vertically beginning to obey Newton's Laws. Rotation going on into beaten-down sectors like telecoms and even miners and energy. We think that continues.

Today was one of those days you're glad that you didn't try to trade anything. Who wants to get in front of whatever the machines will do after tomorrow's ADP number? Better to let it happen and then trade the reaction to the news, against what will hopefully be a clearer technical backdrop.